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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB/A
(Mark One)
X Annual Report Pursuant to Section 13
---
or 15(d) of the Securities and Exchange
Act of 1934 (Fee Required)
for the fiscal year ended December 31, 1995
or
Transition Report Pursuant to Section 13 or 15(d) of
---
the Securities and Exchange Act of 1934 (No Fee Required)
for the transition period from ______to______
Commission File No. 1-13616
STORAGE COMPUTER CORPORATION
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(Exact name of Registrant as specified in its charter)
DELAWARE 02-0450593
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11 RIVERSIDE STREET
NASHUA, NEW HAMPSHIRE 03062-1373
(Address of Principal Executive Offices) (Zip Code)
(603) 880-3005
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(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
$0.001 PAR VALUE COMMON STOCK AMERICAN STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
(Title or Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate by check mark if the disclosure of delinquent filers pursuant to item
405 of Regulation S-B is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in a definitive proxy or information
statement incorporated in Part III of this Form 10-KSB/A or any amendments to
this Form 10-KSB/A. X
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The aggregate market value of the Common Stock of the Registrant held by
non-affiliates was approximately $21,964,527 as of March 20, 1996.
As of January 31, 1996, there were issued and outstanding 10,636,341 shares of
Registrant's Common Stock, with a par value of $.001.
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DOCUMENTS INCORPORATED BY REFERENCE
NONE
STORAGE COMPUTER CORPORATION
Securities and Exchange Commission
Item Numbers and Description
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PART I
PAGE
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ITEM 1. Business.......................................................... 2
ITEM 2. Properties........................................................ 7
ITEM 3. Legal Proceedings................................................. 7
ITEM 4. Submission of Matters to a Vote of Security Holders............... 8
PART II
ITEM 5. Market for Registrant's Common Equity
and Related Stockholder Matters................................... 8
ITEM 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................... 9
ITEM 7. Financial Statements and Supplementary Data....................... 12
ITEM 8. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure............................ 12
PART III
ITEM 9. Directors, Executive Officers, Promoters and Control Persons,
compliance with Section 16(a) of the Exchange Act................ 13
ITEM 10. Executive Compensation........................................... 15
ITEM 11. Security Ownership of Certain Beneficial Owners
and Management................................................... 16
ITEM 12. Certain Relationships and Related Transactions................... 17
ITEM 13. Exhibits and Reports on Form 8-K.................................. 19
-1-
Inasmuch as the calculation of shares of Registrant's voting stock held by
non-affiliates requires a calculation of the number of shares held by
affiliates, such figure, as shown on the cover page hereof, represents the
Registrant's best good faith estimate for purposes of this Annual Report on Form
10-KSB\A and the Registrant disclaims that such figure is binding for any other
purpose. The aggregate market value of Common Stock indicated is based upon the
average of the bid and asked prices of the Common Stock as reported by the
American Stock Exchange for trading on March 20, 1996. All outstanding shares
beneficially owned by executive officers and directors of the Registrant or by
any shareholder beneficially owning more than 5% of Registrant's common stock,
as disclosed herein, were considered solely for purposes of this disclosure to
be held by affiliates.
PART I
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ITEM 1. BUSINESS
Storage Computer Corporation, a Delaware corporation ("SCC" or the
"Company"), designs, manufactures, markets and supports standards-based, high
performance, fault-tolerant data storage solutions, critical to success in
client/server, online transaction processing (OLTP), large database, multimedia,
video-on-demand and high-volume imaging applications. SCC markets products based
on its patented RAID 7(technology, which combines specialized software and
state-of-the-art industry standard hardware to provide a unique, open system
solution for the data storage market. The Company pioneered the concept of the
RAID Level 7 solutions, and this technology incorporates several architectural
features, such as an asynchronous hardware design and a real-time embedded
operating system, which together enables the data transfer at an accelerated
rate of speed with fault tolerance, at a competitive price/performance ratio.
The Company believes that certain portions of its software programs and
architecture are proprietary to it as a result of the fact that they have been
developed by the Company and maintained as confidential information. Some
portions of this technology are also patented. There can be no assurances that
information which the Company believes is proprietary would ultimately be
treated as owned exclusively by the Company. See "Business -- Products and
Proprietary Rights."
Organizations are increasingly deploying data-intensive applications
and services as core business resources. In addition, data-intensive on-line
services have grown significantly. The data intensity of the network environment
is expected to continue to increase substantially due to the development of new
applications and services and the more prevalent use of stored digital graphics,
voice and video, which require dramatically more data capacity than equivalent
alphanumeric information. As this environment evolves, data management will
become increasingly complex and challenging and will increase the need for
value-added performance in data availability, reliability and data access.
Currently, more than 800 customers worldwide, having an installed base
of RAID 7 Storage Servers valued at more than $70,000,000, use SCC's RAID 7
technology to increase productivity and extend the life of their existing
computer investments. RAID 7 Storage Servers currently provide gigabytes, to
over a terabyte of storage, and attach to network file servers, midrange and
mainframe systems supporting the industry-standard SCSI interface. Pricing for
Storage Computer's family of RAID 7 Storage Servers currently ranges from
$21,000 to more than $1,000,000. RAID 7 Storage Servers work with host platforms
sold by vendors such as IBM, Digital, NCR, UNISYS, Sun, HP, SGI and others,
whose products support the industry-standard SCSI interface. The RAID 7 Storage
Server is a product based upon an "open systems" design and works with most
processor products available on today's market. Worldwide distribution and
services are provided via a comprehensive network of subsidiaries, joint
ventures, resellers, integrators and service providers in the United States,
Latin America, the Pacific Rim, Asia, Africa and Europe.
-2-
Vermont Research Products, Inc. ("VRP"), a wholly owned subsidiary of
Storage Computer Corporation which was formed to acquire virtually all of the
assets and business of Vermont Research Corporation ("VRC") in March 1995,
manufactures and sells solid state disks and caching subsystems for mainframe,
midrange and Unix based workstations and servers. During its first 25 years, VRC
manufactured and sold rotating drum memories, some of which are still in use
today. VRC discontinued the manufacture of drum memories in 1984. Over the past
10 years, VRC has expanded its product line to include high performance solid
state disks.
In 1994, VRP introduced a Stealth Cache subsystem, which VRP believes
was the industry's first 5.25-inch SCSI caching system to deliver 800% faster
read/write response times than a standard SCSI disk. VRP's new Stealth Cache
product family consists of four models that provide up to 256 megabytes of cache
memory in 5.25 inch, desktop, tabletop and pedestal configurations. List pricing
begins under $10,000 for a 16 megabyte caching configuration.
The Company's goal is to be a leader in the data storage market. It
seeks to achieve this goal by focusing on product differentiation, embracing
industry standards, broadening its market penetration, increasing distribution
channels and developing new products which will cover the ever expanding data
storage market. The Company currently sells its products domestically and
internationally through a combination of OEMs, distributors, value-added
resellers and its direct sales force.
SCC was incorporated in Delaware in 1991, and maintains its worldwide
headquarters at 11 Riverside Street, Nashua, New Hampshire 03062-1373. SCC's
telephone number is 603-880-3005. SCC also maintains subsidiaries in the United
Kingdom and Germany, and affiliates in France and Hong Kong.
PRODUCT LINES
RAID 7 STORAGE SERVERS are a family of systems that deliver the ultimate
performance of advanced RAID storage. Based upon a performance-optimized,
real-time intelligent storage server architecture, this breakthrough technology
combines high-end, intelligent controller technology, disk drives, a scalable
distributed cache memory mechanism, and a real-time operating system software
environment to deliver some of the highest performing, fault-tolerant storage
available today. The Storage Servers currently support up to 12 independent and
concurrent hosts, up to a single group size of 48 disk drives of any available
capacity, and an architecture that is scalable to multi-terabyte capacities. The
RAID 7 technology is subject to certain patents and patent applications held by
the Company and is available in several models and has features as detailed
below:
STORAGE SERVER PRODUCT FAMILY: available in three configurations: Desktop (Dx),
Rackmount (Rx) and Console (CLx).
OPTIONS
STORAGE ADMINISTRATOR: bi-directional SNMP management.
NON-VOLATILE CACHE: mirrored cache to ensure data integrity.
-3-
K2 is a solid-state SCSI disk packaged in a standard 19" rack mount, supporting
a capacity of 4GB (using 16MB DRAMS). Instantaneous access to mission-critical
data and long-term dependability are the main features of this storage
subsystem. The K2 includes a full non-volatile data retention system with
battery and hard media backup to ensure data integrity.
STEALTHE CACHE is a high performance 5.25" integrated cached disk subsystem
which combines large cache memory, high performance SCSI controllers, battery
backup, PCMCIA disk, and a 3.5" disk in an industry standard 5.25" form factor.
Providing up to 256MB of fault-resilient write cache, Stealth Cache dramatically
improves the performance of UNIX workstations and can be integrated into either
the client or server, within workgroups.
INTEGRATED SYSTEMS
CAID is a cached array of independent disks. CAID is a low-cost,
high-performance RAID 1 cached disk subsystem that combines multiple Stealth
Cache units and their disk drives with redundant power supplies in a compact
housing. CAID is an ideal storage solution for LANs and workgroups.
S3DASD will be a super scalar solid-state direct access storage device. This
product will be configured by integrating K2 solid-state disks into the RAID 7
architecture to provide the highest performing and most fault tolerant offering
in the Company's product line. This unique class of storage products will allow
massive storage and will support applications requiring very high I/O rates on
large amounts of random data, typically found in enterprise and data center
client/server computing.
The Company firmly believes that its RAID 7 technology is superior to other
storage technologies. The key differentiators are described below:
1. PERFORMANCE. The RAID 7 architecture supports the highest level of RAID
technology currently available in storage solutions for use in commercial
applications and, therefore, the Company believes that it supports among the
highest levels of any storage solutions for use in commercial applications.
2. RELIABILITY. RAID 7 has the architectural capability to provide reliability
and data availability. Levels 1,3 and 5 are able to protect only against a
single disk failure. A proposed RAID 6 can protect against two disk failures.
RAID 7 can scale to protect against up to four disk failures. Other RAIDs
support only one hot standby drive, while RAID 7 supports multiple standbys.
3. CAPACITY EXPANSION. Most RAID implementations cannot easily expand the number
of spindles connected, while RAID 7 can grow from 3 to 48 drive channels in low
cost increments. Most RAID levels have a fixed drive capacity that must be used
but RAID 7 can use any size SCSI drive.
4. CONNECTIVITY. Very few RAID implementations will support more than a single
host interface although several products will support a maximum of four. RAID 7
supports twelve host interfaces.
5. "STANDARDS". RAID 7 implements industry standards both internally and
externally. Most competitive products bundle disk drives for marketing reasons.
6. ARCHITECTURE. RAID 7 architecture has 3 key components: asyschronous hardware
and software architecture, a real-time operating system and standards-based
components.
-4-
PATENTS AND PROPRIETARY RIGHTS
SCC's policy is to protect its technology by, among other things, filing
patent applications with respect to its technology considered important to the
development and growth of its business. SCC also relies upon trade secrets,
unpatented know-how, continuing technological innovation and the aggressive
pursuit of licensing opportunities in order to develop and maintain its
competitive position in the data storage marketplace.
SCC has been awarded certain U.S. patents and has additional U.S. patent
applications pending. Foreign counterparts of certain of these applications have
been filed, or may be filed at the appropriate time. SCC decides on a
case-by-case basis as to whether, and in which countries, it will file foreign
counterparts of a U.S. patent application. Despite SCC's vigorous efforts in
protecting its technology and products by securing patents, trademarks and
copyrights where SCC deems such investment of its resources to be prudently
spent in protecting its rights in and to the technology, SCC cannot be assured
that any of these protections will be enforceable or held to be valid against
possible legal challenges in the future. Additionally, SCC cannot be assured
that protections afforded by domestically issued patents will receive similar
safeguards for patents issued in foreign jurisdictions, against the unlicensed
and unauthorized manufacture, use or piracy of SCC's products and technology.
There can be no assurance that SCC will develop proprietary products or
technologies in the future which are patentable, that any issued patent will
provide SCC with any competitive advantages or will not be challenged by third
parties, or that the patents of others will not have a material adverse effect
on SCC's ability to do business.
SCC requires all employees, and most consultants, outside scientific
collaborators, sponsored researchers and other advisors to execute
confidentiality agreements upon the commencement of employment or consulting
relationships with SCC. These agreements provide that all confidential
information developed or made known to the individual during the course of the
individual's relationship with SCC is to be kept confidential and not disclosed
to third parties except in specific circumstances. All of SCC's employees have
entered into agreements providing for the assignment of rights to inventions
made by them while in the employ of SCC.
In the future, litigation may be necessary to protect SCC's technologies
and such litigation may be costly and time consuming. Despite such efforts to
protects its interests, unaothorized parties may attempt to copy aspects of
SCC's products or to obtain and use information that SCC regards as proprietary.
There can be no assurance that SCC attempts to protect its present and future
technologies will be adequate or that SCC's competition will not independently
develop similar technology or exceed SCC's product permances, duplicate SCC's
products or design around patents issued to SCC or other intellectual property
rights of SCC.
COMPETITION
The RAID information storage market is extremely competitive. However,
it is also extremely fragmented. Companies such as IBM, IPL, Digital Equipment
Corporation, EMC, Hewlett-Packard, Micro Technology, Sun Microsystems, UNISYS,
Data General, StorageTek, and more than 100 other public and private companies
provide disk arrays for a wide variety of computer systems, workstations and
PCs. Although the Company, to its knowledge, is currently the only vendor
offering an asynchronous transfer RAID 7 disk array, many of SCC's competitors
benefit from greater market recognition and have greater financial, research and
development, production and marketing resources than the Company.
-5-
FOREIGN OPERATIONS
SCC has established several different operational methods in order to
penetrate, develop and capture international markets. SCC has discovered that a
combination of distributors and value-added resellers (VARs), along with the
development and formation of wholly owned subsidiaries, and affiliated, minority
owned entities, have enabled SCC to penetrate international markets, and
leverage the working capital requirements to maximize returns on its marketing
and sales efforts.
In November 1992, the Company formed Storage Computer Europe, GmbH, a
wholly owned subsidiary located in Wiesbaden, Germany, which provides sales and
product support throughout Europe. In September 1992, SCC entered into a joint
venture agreement as a minority shareholder and formed Storage Computer (Asia)
Ltd. for the purpose of selling and servicing SCC's products in Hong Kong and
China, and managing the distribution operation in the Asia Pacific Region with
the exception of Japan and Australia. Similarly, in December 1995, SCC acquired
a minority interest in Open Storage Solutions, S.A., in France, for the purpose
of collaborating to sell and service products in that region. [Subsequent to the
acquisition, OSS adopted the name Storage Computer (France).]
In the first quarter of 1995, SCC acquired the assets of Vermont
Research Corporation, and its subsidiaries. As a result of this acquisition, SCC
acquired an ongoing operation in the United Kingdom and has restructured the
organization (now called "Storage Computer United Kingdom Ltd.") to manufacture
and support the sales and service of the Company's products in Western Europe.
The remaining international markets are coordinated and supported in the
United States by the Vice President of International Sales, with the use of the
distributor network. The distributors are responsible for bringing the product
line into the region, providing support and maintenance services and maintaining
an inventory of spare parts. The distributors also establish relationships with
VARs (value-added-resellers), who sell the Company's products to final end
users.
The Company currently has sales activity in thirty countries, including
Japan, Germany, the United Kingdom, France, China, Australia, Mexico, Canada,
Saudi Arabia and South Africa. For the year ended December 31, 1995,
international sales accounted for approximately 53% of the total sales for the
Company. For more detailed information, please see Note J, Foreign Operations,
on pages F-17 and F-18 of the Financial Statements for the years ended December
31, 1995 and 1994.
CUSTOMERS
The Company has an extensive worldwide customer list. The RAID 7 product family
has been sold to customers in a broad range of industries including banking,
financial services, transportation, distribution, electric power utilities,
universities, legal services, telecommunications, government, engineering, oil
exploration, manufacturing and printing. K2 has been sold to customers in
telecommunications, process control and defense markets. It is the goal of the
Company to cross-market existing customers, using the full product offering in
order to leverage the existing customer base.
EMPLOYEES
At March 6, 1996, the Company had 84 full time employees. Of these employees, 67
were in the United States, 10 in the United Kingdom and 7 in Germany. The
Company considers its employee relations to be good and none of the Company's
employees are covered by a collective bargaining agreement.
-6-
ITEM 2. PROPERTIES
The Company currently leases a 35,000 sq. ft. facility which is occupied
by its light manufacturing, research and development and office operations in
Nashua, New Hampshire. The lease is with an affiliated entity and in 1995, the
Company paid a monthly rental of $15,000. The current monthly rental payment is
$15,600 per month, which the Company believes is comparable to rentals of
similar nature in the area and is indicative of a fair market rental which could
be obtained from an unrelated third party having negotiated an arms-length
transaction. The Company leases all of its outside sales offices. All of the
Company's property and premises are adequately protected by insurance coverage.
ITEM 3. LEGAL PROCEEDINGS
On December 14, 1994, Raul Kacirek, a former employee of the Company,
instituted a suit against the Company in Superior Court, Cheshire County, New
Hampshire (Dkt. No. 94-E-0102). The suit alleges that the plaintiff properly
exercised, in part, an employee stock option and is entitled to have up to
300,000 shares of Common Stock issued to him, but does not seek monetary
damages. The Company has filed responsive pleadings (including motions and
counterclaims) and believes that the options were not properly and timely
exercised, and that the Complaint is otherwise without merit, and it intends to
defend the case vigorously.
During the third quarter of 1995, Michael J. Flannery, former Vice
President of U.S. Sales, brought several legal actions against Storage Computer
Corporation and/or its President and Chief Executive Officer, Theodore J.
Goodlander, two of which were later withdrawn and one which has been discharged
as described herein below. On July 18, 1995, Mr. Flannery charged the Company
and Mr. Goodlander in Plymouth Superior Court, in Plymouth County,
Massachusetts, for wrongful termination of employment, due to disability and age
discrimination, tortious interference with advantageous relations and other
allegations as a result of his dismissal from the Company (Massachusetts Civil
Action No. 95-154-A). The suit makes a claim for unspecified monetary damages
for alleged damages to Mr. Flannery. Also, Mr. Flannery filed an action with the
New Hampshire Department of Labor on July 17, 1995 for payment of back wages,
commissions and vacation pay. A hearing on this matter was held on November 30,
1995 and a decision in favor of the Company was received on December 29, 1995,
which denied all of Mr. Flannery's claims. The Company believes that the actions
filed and claims made by Mr. Flannery are untrue and without merit and that all
obligations owed to Mr. Flannery have been satisfied and paid in full. The
remaining action has, and will continue to be, vigorously defended.
The Company does not believe that its continuing involvement in, any
judicial decision rendered or the resolution of the two legal proceedings, will
have a material effect upon the Company's business, operating results or
financial condition.
The Company is not presently aware of, or involved in, any other
litigation.
-7-
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
PART II
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ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is traded on the American Stock Exchange
under the symbol "SOS".
The following table sets forth the range of the high and low sales
information for the Common Stock of the Company from March 8, 1995 (the date the
Company's Common Stock commenced trading on the American Stock Exchange) for the
fiscal periods indicated, as reported by the American Stock Exchange.
FISCAL 1995 HIGH LOW
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First Quarter (from March 8, 1995) $13.75 $6.50
Second Quarter $11.88 $6.63
Third Quarter $10.25 $7.88
Fourth Quarter $10.13 $7.00
On February 29, 1996, there were 413 record holders of the Company's Common
Stock. The Company believes the actual number of beneficial owners of the Common
Stock is greater than the stated number of holders of record because a large
number of the shares of the Company's Common Stock is held in custodial or
nominee accounts for the benefit of persons other than the record holder.
The Company has never paid any dividends and does not anticipate paying any
dividends in the foreseeable future.
-8-
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected income
statement data expressed as percentages of net sales.
For the Years Ended December 31
1995(1) 1994(1)
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Net sales 100.0% 100.0%
Cost of goods sold 52.1 43.3
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Gross profit 47.9 56.7
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Sales and marketing expenses 20.8 20.3
General and administrative expenses 4.7 8.9
Royalty expense 2.8 2.3
Engineering and development expenses 9.1 13.1
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Total expenses 37.4 44.6
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Income from operations 10.5 12.1
Other income 0.9 (3.1)
Interest income (expense), net (0.7) (0.5)
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Income before provision for income taxes 10.7 8.5
Provision for income taxes (credit) (0.1) 7.2
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Net income 10.8% 1.3%
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(1) On March 6, 1995, Vermont Research Products, Inc., a wholly-owned subsidiary
of the Company, acquired the entire business and substantially all of the
property and assets of Vermont Research Corporation. The acquisition was
accounted for as a pooling of interests and accordingly, the results of
operations in the financial statements for all of the periods included herein,
are presented as if the acquisition had been consummated at the beginning of the
earliest period presented.
-9-
On March 6, 1995, the Company acquired the assets of Vermont Research
Corporation ("VRC") pursuant to an Agreement and Plan of Reoganization. One
result of this pooling of interests was that the shares of common stock of the
Company exchanged for the VRC common stock were registered with the SEC and the
Company became listed on the American Stock Exchange (stock symbol "SOS"). The
following is the analysis of the financial condition of the Company which
discusses and analyzes the results of operations and financial statements for
the years ended December 31, 1994 and 1995. Such analysis has been conducted to
reflect the retroactive, combined results of operations of the Company and VRC
as if the acquisition had been consummated at the beginning of the earliest
period presented.
FISCAL 1995 COMPARED WITH FISCAL 1994
Net sales increased from approximately $14.5 million in 1994 to $23.1 million in
1995, an increase of 59%. The increase in net sales was due to the opening of
new sales offices, increased marketing and sales efforts and an increase in the
market acceptance of the Company's products. Total sales have been expressed as
a percentage of sales by geographic region in the table below.
Year ended Year ended
December 31, December 31,
1995 1994
US Domestic Sales 39% 47%
US Export Sales- Far East 20% 21%
US Export Sales- Europe 4% 2%
US Export Sales- Other 3% 6%
European Domestic Sales 23% 21%
European Export Sales 11% 3%
Additionally, the Company increased its distribution channels both in and
outside of the U.S. through the use of affiliated distributorships, and
increased its presence in the U.K. as a result of the Company's acquisition of
Vermont Research Corporation, which included a wholly-owned operating subsidiary
in the United Kingdom. The introduction of new products also contributed to the
increase in the Company's net sales.
The Company's gross margin increased from $8,227,631 to $11,076,148, but
decreased as a percentage of sales, from 56.7% in 1994 to 47.9% in 1995. This
decrease in gross margin percentage was due primarily to the sales mix shifting
to larger systems. Such larger systems have lower gross profit margins due to
the fact that more of their components are manufactured by other companies which
have a higher cost and are sold at a lower gross profit margin than those
components which are manufactured by the Company.
Sales and marketing expenses increased from approximately $2.95 million in 1994
(20.3% of sales) to $4.82 million in 1995 (20.8% of sales). Increases and
expansion of sales and marketing efforts, opening of sales offices and the
addition of VRC's sales personnel into the Company's sales force, accounted for
a substantial portion of the increase in sales and marketing expenses. A portion
of the Company's increase in sales and marketing expenses in fiscal 1995 was
related to the expansion of its foreign sales operations. Generally, start up
and expansion expenses for such foreign operations have exceeded such expenses
for similar domestic operations, when expressed as a percentage of sales.
Historically, the initial costs of expanding such operations usually involve
longer purchasing cycles than in the U.S. and hence, require support from the
Company for a longer period of time. It is the Company's belief that the
anticipated long-term returns and results from initiating and maintaining such
operations will offset the initial and development costs, and in the long-term
will yield gross profit margins and net returns to the Company which are similar
to domestic operations, as and if these foreign operations fully mature as
independent operations and continue to expand.
-10-
General and administrative expenses decreased from $1.296 million in 1994 (8.9%
of sales), to $1.090 million in 1995 (4.7% of sales). The decrease was primarily
attributable to the fact that in 1994, additional expenses were incurred due to
the existence of two separate administrative staffs and officers of VRC and the
Company, prior to their consolidation. After the acquisition in 1995, the
consolidation of the two companies' operations enabled the Company to further
reduce personnel in administrative staff positions.
Engineering and development expenses increased in total dollars, from $1,901,091
in 1994 to $2,116,542 in 1995, but decreased as a percentage of sales from 13.1%
in 1994, to 9.1% in 1995. Such decrease in percentage of sales was attributable
to the consolidation of the companies which provided for efficiencies in
personnel at a single location, the discontinuance of some inefficient and older
products, and the elimination of some positions which were considered redundant.
Other income/expense varied almost $576,000 between 1994 and 1995. The largest
portion of the net expense of $493,000 in 1994 was a non-recurring
reorganization charge of over $500,000. This cost was incurred largely from
professional fees for legal and accounting services relating to costs of
registering shares with the SEC and the Company's listing with the American
Stock Exchange which were required by the Company's acquisition of Vermont
Research Corporation.
Income taxes in 1994 were approximately 7.2% of sales, as opposed to a credit of
$27,038 in 1995. The major reasons for the difference are: i) non-deductibility
of the reorganization expenses in 1994 for tax reporting, and ii) subsequent to
the reorganization completed in 1995, the Company was better able to realize
more of the net operating loss carryovers of VRC.
Interest expense increased from 1994 to 1995, primarily as a result of the
carrying cost for larger amounts of inventory to support a corresponding
increase in sales.
Net income increased from $182,985 in 1994 (1.3% of net sales) to $2,486,595 in
1995 (10.8% of net sales) due primarily to increases in sales, improved
operating efficiencies due to economies of scale, and income tax benefits
derived from the Company's acquisition of Vermont Research Corporation in 1995.
LIQUIDITY AND CAPITAL RESOURCES
From its inception through 1993, the Company has financed its growth primarily
from cash generated from operations and seasonal bank borrowings.
Inventories and accounts receivable both increased between 1994 and 1995. Such
increase was necessary to support the increased sales. A major portion of the
increase in inventories was financed by an increase in accounts payable.
As of December 31, 1995, the Company's working capital was $8,910,796, including
cash and cash equivalents of $871,101. On August 6, 1995 the Company entered
into an unsecured line of credit agreement with State Street Bank for
$6,000,000, of which $399,973 had been borrowed at December 31, 1995. The
Company believes that its financial resources, available from cash generated
from operations and its current borrowing facilities, will be sufficient to fund
its operations through the end of 1996.
-11-
FOREIGN CURRENCY RISK
The Company believes that it effectively manages its foreign currency risk by:
(i) conducting most of its sales in U.S. dollars and (ii) managing the
inter-company receivables and payables. Management does not currently utilize
any derivative products to hedge such risk as it believes its current accounting
controls and procedures are adequate to safely address such issues. Although no
specific strategies for management of currency related to the Company's
subsidiaries' receivables and payables exist currently, the Company is presently
reviewing the matter to determine what, if any, policies and procedures should
be implemented. The Company's foreign subsidiaries' obligations to their parent
company are denominated in US Dollars. There is a potential for a foreign
currency gain or loss based upon fluctuations between the US Dollar and the
subsidiaries' functional currencies. This exposure is limited to the period
between the time of accrual of such liability to the parent in the subsidiaries'
local currency and the time of its payment in US Dollars. Other than the
intercompany balances noted above, the Company does not believe it has any
material unhedged monetary assets, liabilities or commitments which are
denominated in a currency other than the operations' functional currency. The
Company expects such exposure to continue until its foreign subsidiaries reach a
mature level of operations.
INFLATION
The Company does not believe that inflation has had any impact on its
operations, sales or net income, during the period covered by this report.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements and pages F-1 through F-18 attached
(Audited annual financial statement for the years ended December 31,
1995 and 1994).
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE
-12-
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information concerning executive
officers and directors of the Company:
NAME AGE POSITION
---- --- --------
Theodore J. Goodlander 52 Chairman of the Board, President and Chief
Executive Officer, Director
Shigeho Inaoka(1)(2) 53 Director
Norunn Heilevang(2) 47 Treasurer
- -----------
(1) Member of Compensation Committee
(2) Member of Audit Committee
THEODORE J. GOODLANDER founded the Company in 1991. He has been a director,
Chairman of the Board of Directors, President and Chief Executive Officer since
the Company's inception. Mr. Goodlander served as President of Cab-Tek, Inc., a
computer accessories manufacturing company, from 1981 to 1984. From 1978 to
1981, he was employed as a private investor and from 1968 to 1978 Mr. Goodlander
held various management positions at Wang Laboratories, Inc., including Vice
President International and Far East Marketing Manager. Mr. Goodlander attended
Syracuse University and is a graduate of the Program for Management Development
at Harvard Business School.
SHIGEHO INAOKA has been a director of the Company since September, 1993. Mr.
Inaoka has served as President of TechnoGraphy, Inc. a manufacturer of
multimedia computer systems and an exclusive distributor of the Company's
products in Japan since 1992. From 1989 to 1992, Mr. Inaoka was President and
Chief Executive Officer of Sony Computer Systems, Inc. He received a business
degree from Meiji University in 1967 and a Masters degree in Computer Systems
Engineering from Tokyo Computer Academy in 1968.
NORUNN HEILEVANG was appointed Treasurer in October 1994. Since 1982, Ms.
Heilevang has also served as Administration Manager of Cab-Tek Inc. From 1978 to
1982, she served as Vice President and Chief Financial Officer of Cizek Audio,
Inc. Ms. Heilevang holds an AA in Accounting from Forde Business College, Forde,
Norway.
All directors hold office until the next annual meeting of the stockholders and
until their successors are elected and qualified. All officers of the Company
are elected annually by the Board of Directors and serve at the Board's
discretion. There are no family relationships among any of the directors, or
officers of the Company.
-13-
BOARD COMMITTEES
The Board of Directors has a Compensation Committee, which makes recommendations
concerning salaries and incentive compensation for employees of, and consultants
to, the Company, and an Audit Committee, which reviews the results and scope of
the audit and other services provided by the Company's independent auditors.
DIRECTOR COMPENSATION
The Board of Directors do not receive any cash compensation for their service on
the Board of Directors. Directors who are employees of the Company are not paid
any additional compensation for serving as directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company has a Compensation Committee, consisting of the current members of
the Board of Directors. The Compensation Committee is responsible for
establishing executive compensation.
-14-
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information with respect to the
compensation paid or accrued by the Company for services rendered to the Company
in all capacities for the fiscal year ended December 31, 1995 by its Chief
Executive Officer and each of the Company's other executive officers whose total
salary and bonus exceeded $100,000 during such fiscal year:
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------- ----------------------
OTHER ALL
ANNUAL STOCK OTHER
NAME AND FISCAL SALARY BONUS COMPENSATION OPTIONS COMPENSATION
PRINCIPAL POSITION YEAR (1) $ $ ($)(2) (#) ($)(3)
------------------ -------- ---------- -------- --------------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Theodore J. Goodlander,
President and Chief Executive Officer 1995 $147,727 --- --- --- ---
</TABLE>
- ------------------------
(1) The Company's fiscal year for 1995 ended on the last day of December.
(2) In accordance with the rules of the Securities and Exchange
Commission, other compensation in the form of perquisites and other
personal benefits has been omitted because such perquisites and other
personal benefits constituted less than the lesser of $50,000 or ten
percent of the total annual salary and bonus reported for the
executive officer during the fiscal year ended December 31, 1995.
(3) The Company did not grant any restricted stock awards or stock
appreciation rights (SARs) or make any long-term incentive plan
payouts to the above named executive during the fiscal year ended
December 31, 1995.
-15-
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of July 16, 1996 by (i) each director of the
Company, (ii) each of the executive officers named in the Summary Compensation
Table above, (iii) all directors and executive officers of the Company as a
group and (iv) each person known by the Company to own beneficially more than
5% of the Common Stock.
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK
BENEFICIALLY OWNED(1)
---------------------
DIRECTORS, OFFICERS AND 5% STOCKHOLDERS NUMBER PERCENT
- --------------------------------------- ------ -------
<S> <C> <C>
Theodore J. Goodlander 4,000,000(1) 37.61%
Storage Computer Corporation.
11 Riverside Street
Nashua, New Hampshire 03062
Goodlander 1990 Family Trust 3,290,000 30.93%
c/o Jeanie McCready, Trustee
22 Kessler Farm Drive #684
Nashua, New Hampshire 03063
Norunn 220,000(2) 2.07%
Heilevang
8 Nigel Lane
Nashua, New Hampshire 03062
Shigeho Inaoka 504,300(3) 4.74%
2 Chome-16-7
Yuwato, Minami Komae-Shi
Tokyo, Japan F201
All directors and executive officers as a group (4).... 8,014,300 75.35%
</TABLE>
----------
(1) Does not include 3,290,000 shares of Common Stock held by the
Goodlander 1990 Trust established for the exclusive benefit of Mr.
Goodlander's children and as to which Mr. Goodlander exercises no
voting or dispositive control and disclaims beneficial ownership.
(2) Does not include 50,000 shares of Common Stock issuable upon the
exercise of options granted under the Company's Amended and Restated
Stock Incentive Plan.
(3) Includes 252,470 shares of Common Stock held by TechnoGraphy, Inc.
for which Mr. Inaoka is an executive officer and in which he owns a
controlling interest. Does not include 10,000 shares of Common Stock
issuable upon exercise of options granted under the Company's Amended
and Restated Stock Incentive Plan.
(4) See Footnotes (1)-(3) above.
-16-
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CAB-TEK, INC.
SCC was spun off by Cab-Tek, Inc., a company which was owned by Mr.
Goodlander and Ms. Heilevang, through the purchase of the related inventory and
fixed assets used in connection with the development of RAID 7. These assets
were in turn contributed as the initial capital of SCC. SCC subsequently
purchased all of the RAID technology and the rights to all issued and pending
patents and trademark of Cab-Tek, Inc. for $10,000 plus a royalty of 3% of SCC's
total net sales, scheduled through March 30, 1996 (up to a cumulative maximum
royalty of $5,000,000). The royalty rate was set within the range of what
management believed to be industry practice, and was substantially lower than
the rate management believes it would have accepted from a non-affiliated party.
The maximum royalty amount was set by management through analysis to determine
an amount reasonable and fair to both parties. Among the factors considered in
the analysis were the history of the related development expenses and risks, the
prospects for the Company's business and earnings, and the development expenses
of similar and competing companies. On December 31, 1995, the Company negotiated
the fully paid termination of the royalty agreement as of December 31, 1995. The
termination included a final contract payment of $10,000 which is included in
royalties paid for 1995. No further payments or obligations are due under the
agreement, and all rights and patents are the property of the Company.
Originally all development, overhead and asset purchases for SCC were
made by Cab-Tek, Inc., until June of 1991 when SCC was separated from Cab-Tek.
From June 1991 to December 1993, Cab-Tek and SCC shared the same facilities and
common expenses. During this period all utility, maintenance and common facility
expenses were allocated on a per square foot basis which management concluded to
be the most reasonable and accurate method, and billed between the related
parties. As of May 1994, Cab-Tek ceased all operations and sharing of any common
expenses.
KRISTIANIA CORP.
SCC currently leases a 35,000 sq. ft. facility which is occupied by its
light manufacturing, research and development and office operations in Nashua,
New Hampshire. The lease is with Kristiania Corp., an affiliated entity, and
during 1995, provided for a monthly rental of $15,000. The Company believes that
the rental is commensurate with fair market rental value of similar facilities
in the area, and is indicative of a rental value which would be attainable in an
arms-length transaction.
STORAGE COMPUTER (ASIA) LTD.
SCC has purchased a minority interest in Storage Computer (Asia) Ltd.
("SCAL"), formed for the purpose of selling and servicing SCC's products in Hong
Kong and China. SCAL is capitalized at HK$3,000,000. Mr. Eddie Hwang (a United
States citizen resident in Hong Kong) invested HK$1,650,000.00 in cash, and
controls fifty-five percent (55%) of SCAL's issued and outstanding stock. Micro
Research Computers Limited ("Micro Research", a Hong Kong based computer and
software company) was issued twenty-five percent (25%) of the shares, in
consideration of the contribution of facilities and engineering services over
the first two years of SCAL's operation, valued at Hong Kong $750,000. SCC
purchased the remaining 20% of the shares for HK$600,000.00 by issuing 22,000
shares of SCC's Common Stock, then valued at US $3.50 per share. No transfer of
SCC's technology was involved in the joint venture, and SCC retains all rights
to the use of SCC's trademarks and the sales territories in the event that the
joint venture is discontinued for any reason. In addition, SCC holds an option
to purchase all of the shares of Mr. Hwang and Micro Research at a price to be
negotiated at the time of exercise. If and when SCC elects to exercise its
option to purchase all of the shares of SCAL, purchasers of shares of Common
Stock offered hereby will suffer an immediate dilution in the net tangible value
of the Common Stock.
-17-
OPEN STORAGE SOLUTIONS
Per the terms of an agreement executed on December 22, 1995, the
Company purchased 1,375 voting shares of Open Storage Solutions, S.A., for
approximately $55,000. Such shares represent a 20% interest in the organization,
which has been named as exclusive distributor in France. Such agreement does not
restrict any of SCC's OEMs, systems integrators or distributors selling to
customers in France. The agreement is terminable upon various conditions, one of
which is that Mr. Frank Borens is no longer the majority owner and chief
executive officer of the organization, various pricing commitments and sets
forth the parties' mutual obligations, representations and warranties, including
the organization's adoption of the name "Storage Computer (France)". The
organization was developed to promote, sell and service SCC's products and to
further increase the market opportunities for SCC's products in France. No
transfer of SCC's technology was made per the terms of the agreement which
protects SCC's rights to sell its products in the event of termination of the
agreement for any reason .
RELATED PARTY DEBT
Since the inception of the Company, Mr. Goodlander and Cab-Tek, Inc.
have made secured cash loans to the Company at interest rates of prime plus 1%
in total amounts of $465,000 and $775,000, respectively. In December of 1994,
the Cab-Tek note payable of $775,000 was assigned to Mr. Goodlander in payment
of monies owed to Mr. Goodlander by Cab-Tek, Inc. As of December 31, 1995, the
debts owing to Mr. Goodlander, under his own note and the note assigned to him
by Cab-Tek, Inc., was $910,000. The note is unsecured and is subordinate to the
note being held by the bank which provides the Company's line of credit.
Amounts totalling $299,500 of deferred salary payable due to Mr.
Goodlander, as CEO and President of the Company, are reflected in the December
31, 1995 and 1994 balance sheets.
For the years ended December 31, 1995 and 1994, the Company had sales
to affiliates of approximately $1,700,000 and $442,000, respectively. Included
in accounts receivable at December 31, 1995 and 1994 are amounts due from
affiliates of approximately $731,000 and $221,000, respectively.
During the year ended December 31, 1993, certain relatives of Mr.
Goodlander, namely Mr. Samuel A. Tamposi and The Barbara S. Tamposi Revocable
Trust made secured loans at an 8% interest rate in the amount of $90,000 and
$300,000, respectively. During the year ended December 31, 1993 the Samuel A.
Tamposi loan was repaid in full. During the year ended December 31, 1994 the
Barbara S. Tamposi Revocable Trust loan was repaid in full by a cash payment of
$149,500 and the issuance of 43,000 shares of Storage Computer Corporation stock
for $150,500. In addition, Mr. Samuel A. Tamposi purchased 100,000 shares of
Storage Computer Corporation stock for a cash payment of $350,000.
CONVERSION OF SUBORDINATED CONVERTIBLE DEBENTURES
On October 22, 1993, SCC issued 6% Subordinated Debentures due October
21, 1994 to each of TechnoGraphy, Inc. (an SCC distributor), Shigeho Inaoka (an
SCC director) and Shuji Yokoyama (collectively the "Lenders"), in the principal
amounts of $115,000, $350,000 and $940,000, respectively. On October 21, 1994,
each of the Lenders converted the entire principal amount of the Debentures into
392,500 shares of Common Stock, at the price of $3.50 per share of Common Stock,
such conversion price having been determined by the Company and the Lenders to
be the fair market value of the Company's Common Stock as of October, 1993.
-18-
TERMS OF RELATED PARTY TRANSACTIONS
SCC believes the foregoing transactions were on terms no less favorable
to SCC than could have been obtained from unaffiliated third parties. As a
matter of policy, in order to reduce the risks of self-dealing or a breach of
the duty of loyalty to SCC, all future transactions between SCC and any of its
officers, directors or principal stockholders will be subject to approval by a
majority of the disinterested members of the Board of Directors of SCC.
-19-
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are included as part of the report:
(1) Financial Statements
The following financial statements of the Company and
the report of the independent certified public
accountants are filed as part of this report:
Index to Financial Statements
Report of Independent Public Accountants
Balance Sheets
Statements of Income
Statements of Stockholders' Equity
Statements of Cash Flows
Notes to Financial Statements
(2) Financial Statement Schedules
None
(3) Exhibits
Certain of the exhibits listed hereunder have been
previously filed with the Commission as exhibits to certain
prior registration statements and periodic reports as
indicated in the footnotes below. The location of each
document so incorporated is indicated by footnote.
*3.1 Restated Articles of Organization
*3.2 Amended and Restated By-Laws
*4.1 Specimen Common Stock Certificate
*10.1 Agreement and Plan of Reorganization:(re:acquisition of the assets
of Vermont Research Corporation), including amendments thereto,
including shareholders votes, proxy statement/prospectus and S-4
Registration Statement as amended
*10.2 Revolving Credit Agreement dated August 6, 1995 between the Company
and State Street Bank (incorporated herein by reference to Exhibit 1
to Form 10-QSB for the quarter ended June 30, 1995)
*10.3 Lease Agreement between the Company and Kristiania Corp.
*21.1 Subsidiaries of the Company
-------------------------------------
* previously filed
(b) Reports on Form 8-K
A report on Form 8-K was filed by the Company on December 15, 1995.
-20-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in Nashua, New Hampshire,
on the 1st day of August, l996.
STORAGE COMPUTER CORPORATION
BY: /s/Theodore J. Goodlander
-----------------------------------------
Theodore J. Goodlander
President and Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of l934, this
report has been signed below by the following persons on behalf of the
registrant and in their capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<S> <C> <C>
/s/Theodore J. Goodlander Chairman of the Board of Directors, CEO August 1, 1996
- -------------------------- (Principal Executive Officer and -------------------
Theodore J. Goodlander Pricnipal Accounting Officer)
* Director August 1, 1996
- -------------------------- -------------------
Shigeho Inaoka
* By: /s/ Theodore J. Goodlander
--------------------------
Theodore J. Goodlander,
Attorney-in-fact
</TABLE>
-21-
STORAGE COMPUTER CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND DECEMBER 31, 1994
- I N D E X -
PAGE
NUMBER
------
INDEPENDENT AUDITORS' REPORT F-1
CONSOLIDATED BALANCE SHEETS AS AT
DECEMBER 31, 1995 AND DECEMBER 31, 1994 F-2
CONSOLIDATED STATEMENTS OF OPERATIONS FOR
THE YEARS ENDED DECEMBER 31, 1995 AND 1994 F-3
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY FOR THE YEARS ENDED DECEMBER 31, 1995
AND 1994 F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR
THE YEARS ENDED DECEMBER 31, 1995 AND 1994 F-5
NOTES TO FINANCIAL STATEMENTS F-7
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
Storage Computer Corporation
Nashua, New Hampshire 03062
We have audited the accompanying consolidated balance sheet of Storage
Computer Corporation and subsidiaries as at December 31, 1995 and December 31,
1994, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, based on our audit and the report of the other
auditors, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Storage Computer
Corporation and subsidiaries as at December 31, 1995 and December 31, 1994, and
the consolidated results of their operations and their consolidated cash flows
for the years then ended in conformity with generally accepted accounting
principles.
Cambridge, Massachusetts
March 4, 1996
F-1
STORAGE COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------
A S S E T S 1995 1994
- ----------- ---------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents............................. $ 871,101 $ 3,288,106
Accounts receivable (Note E).......................... 7,212,091 3,724,133
Inventories (Note B).................................. 4,580,066 2,783,877
Prepaid expenses and other current assets............. 106,751 71,755
Tax receivable........................................ 34,003
Deferred tax asset (Note I)........................... 529,997 222,795
----------- -----------
Total current assets..................... 13,334,009 10,090,666
----------- -----------
Deferred tax asset (Note I) ............................... 588,000 -
------------ ----------
Property and equipment, (net of accumulated
depreciation and amortization of $1,195,662
in 1995 and $1,061,867 in 1994) (Note C).............. 790,605 614,259
----------- -----------
Investment in affiliates .................................. 55,000 23,390
----------- -----------
T O T A L................................ $14,767,614 $10,728,315
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Note payable (Note D)................................. $ 399,973 $
Current portion of long-term debt (Note D)............ 4,406
Current portion of lease obligation payable (Note F).. 35,271 20,000
Accounts payable...................................... 2,350,730 924,326
Accrued expenses...................................... 990,171 1,144,584
Accrued income taxes.................................. 931,016 1,032,439
Deferred stockholder compensation (Note E)............ 299,500 299,500
Deferred executive compensation....................... 70,208
----------- -----------
Total current liabilities................ 5,011,067 3,491,057
----------- -----------
Long-term debt, less current portion (Note D).............. 6,187 550,000
Lease obligation, less current portion (Note F)............ 55,407 18,100
Long-term debt, related party (Note D and E)............... 910,000 910,000
Other long-term liabilities................................ ___________ 87,000
-----------
Total long-term liabilities.............. 971,594 1,565,100
----------- -----------
COMMITMENTS (Notes E, F, G and H)
Stockholders' equity (Note H):
Preferred stock, par value $.001; authorized in
1995 25,000,000 issued and outstanding none
Common stock, par value $.001; authorized
25,000,000 in 1995 and 20,000,000 in 1994;
issued 10,636,341 at December 31, 1995
and 10,381,341 at December 31, 1994.............. 10,636 10,381
Additional paid-in capital........................... 12,223,860 11,597,915
Retained earnings (deficit) (3,449,543) (5,936,138)
----------- -----------
8,784,953 5,672,158
----------- -----------
T O T A L.............................. $14,767,614 $10,728,315
=========== ===========
</TABLE>
The accompanying notes to financial statements
are an integral part hereof.
F-2
STORAGE COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended
December 31,
------------
1995 1994
----------- -----------
<S> <C> <C>
Net sales................................................ $23,130,413 $14,522,887
Cost of goods sold....................................... 12,054,265 6,295,256
----------- -----------
Gross profit........................... 11,076,148 8,227,631
----------- -----------
Operating expenses:
Selling and marketing............................... 4,820,680 2,948,324
General and administrative.......................... 1,089,797 1,295,858
Research and development............................ 2,116,542 1,901,091
Royalty expense (Note G)............................ 648,558 331,862
----------- -----------
8,675,577 6,477,135
----------- -----------
Operating income....................... 2,400,571 1,750,496
----------- -----------
Other income (expense):
Reorganization (expense) credit (Note A)............ 134,821 (506,088)
Foreign currency transaction gain .................. 8,763 51,785
Interest income..................................... 84,804 140,497
Interest expense (Note E)........................... (238,414) (213,826)
Other income ....................................... 92,402 34,748
----------- -----------
82,376 (492,884)
----------- -----------
Equity in net loss of affiliates......................... (23,390) (28,087)
----------- -----------
Income before income taxes............. 2,459,557 1,229,525
----------- -----------
Provision for federal and state income taxes (Note I):
Current tax expense............................. 869,164 1,046,859
Deferred tax (benefit) expense.................. (896,202) (319)
----------- -----------
(27,038) 1,046,540
----------- -----------
NET INCOME............................. $ 2,486,595 $ 182,985
=========== ===========
Net income per share..................................... $0.21 $0.02
=========== ==========
Weighted shares outstanding.............................. 11,784,441 10,838,324
=========== ===========
</TABLE>
The accompanying notes to financial statements
are an integral part hereof.
F-3
STORAGE COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Cumulative
Common Stock Additional Retained Foreign
------------ Paid-In Earnings Currency
Shares Par Value Capital (Deficit) Translation
------ --------- ------- --------- -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993........... 9,701,341 $ 9,701 $ 9,215,344 $(6,119,123) $(14,629)
Equity adjustment from foreign
currency translation............ 14,629
Sale of common stock................. 136,500 137 477,434
Conversion of debt into common
stock ................... 543,500 543 1,905,137
Net income........................... 182,985
----------- ----------- ----------- ----------- --------
Balance - December 31, 1994.......... 10,381,341 10,381 11,597,915 (5,936,138) -
Conversion of debt into common
stock (Note D).................. 135,000 135 624,865
Exercise of stock options............ 120,000 120 1,080
Net income........................... 2,486,595
---------- -------- ----------- ----------- --------
10,636,341 $ 10,636 $12,223,860 $(3,449,543) $ -
========== ======== =========== =========== ========
</TABLE>
The accompanying notes to financial statements
are an integral part hereof.
F-4
STORAGE COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
December 31,
------------
1995 1994
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income ........................................... $ 2,486,595 $ 182,985
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization.................. 302,041 216,093
Deferred tax (benefit)......................... (896,202) (319)
Amortization of debt discount.................. 74,854
Equity in net loss of Storage Computer
(Asia), Ltd................................ 23,390 28,807
Gain on foreign currency
translation adjustment..................... (8,763) (51,785)
Gain on sale of property....................... (14,668)
Changes in operating assets and liabilities:
Accounts receivable............................ (3,487,958) (1,401,656)
Inventories.................................... (1,796,189) (1,423,200)
Other current assets........................... (68,979) 41,445
Accounts payable and accrued expenses.......... 1,099,506 1,799,788
----------- -----------
Net cash used in operating activities...... (2,271,705) (622,510)
----------- -----------
Cash flows from investing activities:
Capital expenditures.................................... (388,953) (448,178)
Proceeds from sale of property.......................... 34,500
Investment in Storage Computer France................... (55,000) -
---------- -----------
Net cash used in investing activities...... (443,953) (413,678)
----------- -----------
Cash flows from financing activities:
Net proceeds from credit line........................... $ 399,973
Repayment on long-term debt and capital lease
obligations......................................... (15,263) (525,898)
Net proceeds from issuance of common stock.............. 477,571
Reduction of other long-term liabilities................ (87,000) -
----------- -----------
Net cash provided by (used in) financing
activities............................... 297,710 (48,327)
----------- -----------
Effect of exchange rate changes on cash ..................... 943 5,969
----------- -----------
Net decrease in cash and cash equivalents.................... (2,417,005) (1,078,546)
Cash and cash equivalents - beginning of year................ 3,288,106 4,366,652
----------- -----------
CASH AND CASH EQUIVALENTS - END OF YEAR...................... $ 871,101 $ 3,288,106
=========== ===========
</TABLE>
The accompanying notes to financial statements
are an integral part hereof.
F-5
STORAGE COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
December 31,
------------
1995 1994
---- ----
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash payments for
Interest ........................................ $ 141,865 $ 125,949
========== ==========
Taxes ........................................ $1,035,000 $ 35,000
========== ==========
Supplemental schedule of noncash financing activities:
Equipment acquired under capitalized lease........... $ 77,000 $ 24,000
========== ==========
Equipment financed by long-term debt................. $ 12,000
==========
Debt converted to common stock 135,000 shares
issued 1995; 543,500 shares issued 1994
Increase in common stock......................... 135 543
Increase in additional paid-in capital........... 624,865 1,905,137
---------- ----------
DECREASE IN DEBT ........................... $ 625,000 $1,905,680
========== ==========
</TABLE>
The accompanying notes to financial statements
are an integral part hereof.
F-6
STORAGE COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE A) - Nature of Business and Significant Accounting Policies:
[1] Nature of business:
The Company is engaged in the development, manufacture and
sale of computer disk arrays and computer equipment worldwide. The Company began
making sales in 1992 and became an operating company during the year ended
December 31, 1993. The term "Company" means, unless the context requires
otherwise, the Company and its subsidiaries and their respective predecessors.
[2] Significant accounting policies:
(a) Principles of consolidation:
The consolidated financial statements include the
accounts of the Company and its wholly owned
subsidiaries, Storage Computer Europe GmBH, and
Vermont Research Products, Inc. and its subsidiary,
Storage Computer UK Ltd. All significant intercompany
accounts and transactions have been eliminated. The
Company accounts for its investments in Storage
Computer (Asia) Ltd. and Storage Computer France, SA,
20%-owned affiliates, by the equity method of
accounting.
On March 6, 1995, Vermont Research Products, Inc., a
wholly owned subsidiary of the Company acquired the
entire business and substantially all of the property
and assets of Vermont Research Corporation ("VRC")in
exchange for SCC common stock ("the Reorganization")
The Reorganization was accounted for as a pooling of
interests. Accordingly, the results of operations of
Vermont Research Products, Inc. are included in the
consolidated financial statements for all periods
presented as if the Reorganization had been
consummated at the beginning of the earliest period
presented. The transaction required the issuance of
approximately 748,000 shares of the Company's common
stock. In connection with the Reorganization, the
Company accrued certain expenses in 1994 resulting in
an expense charge of $506,088. Actual expenses were
less than anticipated resulting in a credit of
$134,821 in 1995.
(continued)
F-7
STORAGE COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE A) - Nature of Business and Significant Accounting Policies:
(continued)
[2] Significant accounting policies: (continued)
(a) Principles of consolidation: (continued)
The following is a reconciliation of 1994 sales and
net income to include the operations of Vermont
Research Products, Inc.:
<TABLE>
<CAPTION>
Net income
(loss) Net Sales
------ ---------
<S> <C> <C>
Storage Computer Corporation.... $11,983,279 $1,118,192
Vermont Research Products, Inc.. 2,539,608 (935,207)
---------- ----------
Combined ....................... $14,522,887 $ 182,985
=========== ==========
</TABLE>
Summary results of operations for the 1995 period
prior to the consummation of the Reorganization
(January 1, 1995 to March 6, 1995) are not available.
(b) Inventories:
Inventories are stated at the lower of cost (first-in,
first-out method) or market.
(c) Depreciation and amortization:
Depreciation and amortization of property and
equipment is computed using both the straight-line and
accelerated methods over the following useful lives:
Years
-----
Computer equipment........................... 5 - 7
Machinery and equipment...................... 5 - 7
Office equipment............................. 5 - 7
Leasehold improvements ...................... 15
Research and development equipment........... 5 - 7
Vehicle ..................................... 5
F-8
STORAGE COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE A) - Nature of Business and Significant Accounting Policies:
(continued)
[2] Significant accounting policies: (continued)
(d) Revenue recognition:
The Company recognizes revenue when its products are
shipped to its customers and sales returns when they
are incurred.
(e) Cash and cash equivalents:
The Company considers all highly liquid instruments
with a maturity of three months or less, when
acquired, to be cash equivalents.
(f) Earnings per share:
Earnings or loss per share data is computed using the
weighted average number of shares of common stock
outstanding and dilutive common equivalent shares.
(g) Warranty costs:
The Company offers various maintenance and warranty
agreement plans. The Company provides for future
warranty costs based on actual claims experience.
(h) Use of estimates
The preparation of financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that
affect the reported amount of assets and liabilities
and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported
amounts of revenue and expenses during the reporting
period. Actual results could differ from those
estimates.
F-9
STORAGE COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE B) - Inventories:
At December 31, 1995 and December 31, 1994, the components of
inventories were as follows:
December 31,
------------
1995 1994
--------- ----------
Raw materials and
purchased components...... $2,128,947 $1,706,549
Work in process............... 615,200 349,273
Finished goods................ 1,835,919 728,055
--------- ----------
$4,580,066 $2,783,877
========== ==========
(NOTE C) - Property and Equipment:
Included in property and equipment for the years ended December 31,
1995 and 1994 is equipment acquired under capital lease of approximately
$101,000 and $24,000, respectively. Property and equipment are stated at cost
and are summarized as follows:
December 31,
------------
1995 1994
---- ----
Computer equipment and
software .................. $ 370,139 $ 258,288
Machinery and equipment....... 939,869 1,102,689
Office equipment ............. 117,885 60,845
Vehicles ..................... 191,303 14,719
Research and development
equipment ................. 318,604 205,995
Leasehold improvements........ 48,467 33,590
---------- ---------
T o t a l.... 1,986,267 1,676,126
Less accumulated depreciation
and amortization.......... 1,195,662 1,061,867
---------- ----------
B a l a n c e .. $ 790,605 $ 614,259
========== ==========
F-10
STORAGE COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE D) - Indebtedness:
Details of the Company's indebtedness are as follows:
(a) Note payable:
As of December 31, 1995, the Company had an unsecured demand
line of credit with maximum borrowings of $6,000,000. During the term of the
agreement, borrowings bear interest at the bank's prime rate, which was 8.5% at
December 31, 1995. The agreement contains certain conditions including, but not
limited to, restrictions related to working capital, net worth, and certain
financial ratios. At December 31, 1995, the Company had $399,973 of borrowings
under this agreement.
(b) Long-term debt:
On June 8, 1993, the Company issued 10% subordinated notes in
the principal amount of $625,000. The notes were issued with warrants to
purchase shares of common stock. The warrants were valued by the Company
creating debt discount. At December 31, 1994 the discounted amount of the
subordinated notes amounted to $550,000. During 1995, all of the notes were
converted into 135,000 shares of common stock and the related warrants were
canceled.
(c) Long-term debt:
December 31,
------------
1995 1994
---- ----
Note payable due July 1998,
interest at 12.82, collateralized
by a vehicle with an original
cost of $12,000, monthly
payments of principal and interest
of $397........................... $ 10,593
Less current portion ............. 4,406
--------
$ 6,187
========
(continued)
F-11
STORAGE COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE D) - Indebtedness:
(continued)
(d) Long-term debt related party:
Note payable due to the president of the Company , due
January 1998 with interest at prime plus 1%, unsecured and subordinated to the
demand line of credit. The balance of this note was $910,000 at December 31,
1995 and 1994.
(NOTE E) - Related Party Transactions:
The Company currently leases its US facilities from an affiliated
entity for a monthly rental $15,600. Rent expense for the years ended December
31, 1995 and 1994 amounted to $152,576 and $105,456, respectively.
As stated in Note D, the Company has had certain notes payable
transactions with related parties. Interest expense charged to operations
related to these notes amounted to $91,000 and $80,604 for the years ended
December 31, 1995 and 1994, respectively.
Amounts totaling $299,500 of deferred salary payable due to the
President, a major stockholder, are reflected in the December 31, 1995 and 1994
balance sheets.
For the years ended December 31, 1995 and 1994 the Company had sales
to affiliates of approximately $1,700,000 and $442,000, respectively. Included
in accounts receivable at December 31, 1995 and 1994 are amounts due from
affiliates of approximately $731,000 and $221,000.
F-12
STORAGE COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE F) - Lease Obligations:
[1] Operating leases:
The Company leases certain property and equipment under
noncancelable leases which expire at various dates through 1997. Future minimum
payments are as follows:
Year Ending
December 31,
------------
1996....................................... $10,688
1997....................................... 5,059
Amounts charged to operations under these leases were $10,688 and
$13,872 for the years ended December 31, 1995 and 1994, respectively.
[2] Capital leases:
The Company has entered into various capital leases for
equipment. Future minimum payments under these leases are as follows:
Year Ending
December 31,
------------
1996....................................... $36,970
1997....................................... 29,022
1998....................................... 27,799
1999....................................... 1,461
-------
T o t a l............... $95,252
Less amounts representing
interest................................ 4,574
-------
Present value of future
lease payments.......................... 90,678
Less amounts due within
one year................................ 35,271
-------
Amounts due after one year................. 55,407
=======
F-13
STORAGE COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE G) - Royalty:
The Company had a royalty agreement with an entity which is related
through common ownership. The royalty agreement transferred certain patent
rights from the related entity to the Company in exchange for a 3% royalty on
net sales up to a maximum cumulative royalty of $5,000,000. The royalty
agreement was terminated by mutual consent on December 31, 1995. The Company
incurred royalty expense under this agreement of $648,558 and $331,862 for the
years ended December 31, 1995 and 1994, respectively
(NOTE H) - Stock Option Plan:
The Company has a stock option plan which provides for the granting of
options to purchase up to 2,500,000 shares of common stock. Option activity
during 1994 and 1995 is summarized as follows:
Number of Option Price
Shares Per share
--------- -------------
Balance - December 31, 1993............ 1,723,500 $ .01 to $3.50
Granted................................ 642,700 $3.50 to $3.60
Canceled............................... (497,000) $ .10 to $3.50
---------
Balance - December 31, 1994............ 1,869,200 $ .01 to $3.60
Granted................................ 121,950 $2.10 to $3.50
Exercised.............................. (120,000) $ .01
Canceled ............................. (363,750) $ .01 to $3.60
---------
Balance - December 31, 1995............ 1,507,400
=========
Options for 879,488 shares are exercisable at December 31, 1995 at an
average price of $.82 per share. At December 31, 1995, options to purchase
992,600 shares were available for grant under the plan.
F-14
STORAGE COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE I) - Income Taxes:
As of December 31, 1995 and 1994, the Company has no net deferred tax
liabilities for temporary differences included in its balance sheet. As of
December 31, 1995 and 1994, the Company has net deferred tax assets as shown in
the following table.
Temporary differences:
December 31,
------------
1995 1994
---- ----
Deferred wages........................ $ 102,000 $ 130,122
Deferred inventory capitalization
costs ......................... 10,168 8,468
Deferred revenue...................... 40,000 19,527
Accrued expenses...................... 20,000 64,678
General business tax credits.......... 360,000 360,000
Domestic net operating loss
carryover......................... 2,380,000 2,431,000
Foreign net operating loss
carryover......................... 613,800 563,800
---------- ----------
Total deferred tax assets ............ 3,525,968 3,577,595
Valuation allowance................... 2,407,971) 3,354,800)
----------- ----------
Net deferred tax assets ..... $1,117,997 $ 222,795
Less current portion ........ 588,000
---------- ----------
Noncurrent $ 529,997 $ 222,795
========== ==========
The domestic net operating loss carryovers, amounting to approximately
$7,000,000 expire at various dates through 2009 and the foreign net operating
loss carryovers amounting to approximately $2,440,000 can be accrued forward
indefinitely. The general business tax credits expire at various dates through
2001.
(continued)
F-15
STORAGE COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE I) - Income Taxes (continued):
The following table reconciles the tax provision per the accompanying
statements of operations with the expected provision obtained by applying
statutory rates to the pretax income.
December 31,
------------
1995 1994
---- ----
Income before income taxes.................... $2,459,577 $1,229,525
========== ==========
Expected tax at Federal statutory
rate of 34% .............................. $ 836,000 $ 418,000
Adjustments due to:
Increase (decrease)in valuation reserve.... (947,000) 492,000
Tax credits .............................. (115,000) (122,000)
Nondeductable expenses (nontaxable income) (56,000) 205,000
Foreign rate differential .................. 85,000
State income taxes, net of federal
income tax effect....................... 99,000 118,000
Other....................................... 71,000 (64,000)
---------- ----------
Tax provision per financial statements
(rounded) ............................. $ (27,000) $1,047,000
=========== ==========
For the year ended December 31, 1995 and 1994, nondeductible expenses
and nontaxable income relate primarily to costs incurred with the Company's
Reorganization with Vermont Research Products, Inc. (Note A).
(continued)
F-16
STORAGE COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE I) - Income Taxes (continued):
The components of the provision (benefit) for income taxes are as
follows:
1995 1994
--------- ---------
Current, net of business tax credits
of $115,000 and $122,000 in 1995
and 1994, respectively................. $ 869,164 $1,046,859
Deferred income taxes, exclusive of
change in valuation allowance.......... 50,627 (319)
Change in valuation allowance............... (946,824) -
-------- ---------
Tax provisions per financial statements
(rounded) ........................ $(27,000) $1,047,000
======== ==========
(NOTE J) - Foreign Operations:
Operations by geographic area are summarized as follows:
<TABLE>
<CAPTION>
United
States Europe Eliminations Consolidated
--------- ------ ------------ ------------
<S> <C> <C> <C> <C>
1995:
Domestic sales to
unaffiliated customers....... $ 8,928,000 $5,260,000 $ $14,188,000
Export sales to
unaffiliated customers....... 6,328,000 2,613,000 8,941,000
Transfers between
geographic areas............. 6,414,000 290,000 (6,704,000)
----------- --------- ---------- ------------
Total revenue....... $21,670,000 $8,163,000 $(6,704,000) $ 23,129,000
=========== ========== =========== ============
Net income (loss)................ $2,466,000 $ (103,000) $ 124,000 $2,487,000
Total assets .................... 16,307,000 3,661,000 (5,200,000) 14,768,000
Total liabilities................ 6,464,000 3,996,000 (4,477,000) 5,983,000
</TABLE>
(continued)
F-17
STORAGE COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE J) - Foreign Operations (continued):
<TABLE>
<CAPTION>
United
States Europe Eliminations Consolidated
------ ------ ------------ ------------
<S> <C> <C> <C> <C>
1994:
Domestic sales to
unaffiliated customers...... $ 6,832,000 $ 3,029,000 $ 9,861,000
Export sales to
unaffiliated customers...... 4,145,000 517,000 4,662,000
Transfers between
geographic areas............ 2,399,000 179,000 (2,578,000)
----------- --------- ----------- -----------
Total revenue...... $13,376,000 $ 3,725,000 $(2,578,000) $14,523,000
=========== =========== =========== ===========
Net income (loss)............... $ 938,000 $ (555,000) $ (200,000) $ 183,000
Total assets ................... 11,615,000 1,966,000 (2,853,000) 10,728,000
Total liabilities............... 4,755,000 2,000,000 (1,699,000) 5,056,000
</TABLE>
Total revenue by geographic area includes both sales to unaffiliated
customers and transfers between geographic areas. Such transfers are accounted
for at prices which the Company considers comparable to normal, unaffiliated
customer sales.
Export sales from the United States to unaffiliated customers are summarized as
follows:
1995 1994
--------- ---------
Far East............................ $4,542,000 $3,009,000
Europe.............................. 1,061,000 261,000
Other............................... 725,000 875,000
---------- ----------
$6,328,000 $4,145,000
========== ==========
For the years ended December 31, 1995 and 1994 sales to one unaffiliated
customer were in excess of 10% of net sales and amounted to $2,602,000 and
$1,881,000, respectively.
F-18
